The Profitability of a Combined Signal Approach: Bollinger Bands and the ADX

International Federation of Technical Analysts' Journal, 2014 Edition

7 Pages Posted: 10 Mar 2013 Last revised: 4 Sep 2013

See all articles by Lim Kai Jie Shawn

Lim Kai Jie Shawn

University College London - Department of Economics

Tilman Hisarli

University College London - Department of Economics

Ng Shi He

Singapore Management University

Date Written: March 8, 2013

Abstract

This article looks at the profitability of a trading rule based on Bollinger bands applied over 1995 to 2012 in 6 different equity markets using large-cap indices (CAC, DAX, FTSE, HSI, KOSPI, NIKKEI). In addition, we also explore the performance of a trading strategy based on a combined signal approach, with Bollinger band signals filtered using the ADX to avoid trending markets. While the trading strategy based solely on these indicators would underperform a buy and hold strategy in most of the markets studied, we find evidence supporting the use of Bollinger bands for tactical trades over short time horizons as evidenced by return distributions with a strong positive skew. When comparing the performance of Bollinger bands with the strategy augmented by the ADX, we find little performance improvement when applied on a systematic basis as an initial filter. However, the ADX can still act as a useful tool when applied on a discretionary basis to limit losses.

Suggested Citation

Kai Jie Shawn, Lim and Hisarli, Tilman and Shi He, Ng, The Profitability of a Combined Signal Approach: Bollinger Bands and the ADX (March 8, 2013). International Federation of Technical Analysts' Journal, 2014 Edition. Available at SSRN: https://ssrn.com/abstract=2230499 or http://dx.doi.org/10.2139/ssrn.2230499

Lim Kai Jie Shawn (Contact Author)

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom

Tilman Hisarli

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom

Ng Shi He

Singapore Management University ( email )

Li Ka Shing Library
70 Stamford Road
Singapore 178901, 178899
Singapore

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